What Is Life Insurance?

Life insurance is a contract that pledges payment of an amount to the person assured (or his nominee) on the happening of the event insured against. The contract is valid for payment of the insured amount during: The date of maturity, or Specified dates at periodic intervals, or Unfortunate death, if it occurs earlier.

Why We Need Insurance:

Life insurance is a contact by which you can protect yourself against specific uncertainties by paying a premium over a period. Since each one of us during our lives are faced with numerous risks-falling health, financial losses, accident and even fatalities. Protection You need life insurance to be there and protect the people you love, making sure that your family has a means to look after itself after you are gone. It is a thoughtful business concept designed to protect the economic value of a human life for the benefit of those financially dependent on him. Retirement Life insurance makes sure that you have regular income after you retire and helps you maintain your standard of living. It can ensure that your post-retirement years are spent in peace and comfort. Savings and Investments Insurance is a means to Save and Invest. Your periodic premiums are like Savings and you are assured of a lump sum amount on maturity. A policy can come in handy at the time of your childs education or marriage! Besides, it can be used as supplemental retirement income.

 Tax Benefits Life insurance is one of the best tax saving options today. Your tax can be saved twice on a life

Insurance An Introduction :
Insurance is actually a contract between 2 parties whereby one party called insurer undertakes in exchange for a fixed sum called premium to pay the other party happening of a certain event. Insurance described as a social device to reduce or eliminate risk of life and property. Under the plan of insurance, a large number of people associate themselves by sharing risk, attached to individual. Large number of people exposed to a similar risk , With the help of Insurance, makes contributions to a common fund out of which the losses suffered by the unfortunate few due to accidental events, are made good. The risk, which can be insured against include fire, the peril of sea, death, incident, & burglary. Any risk contingent upon these may be insured against at a premium commensurate with the risk involved. Insurance is a contract whereby, in return for the payment of premium by the insured, the insurers pay the financial losses suffered by the insured as a result of the occurrence of unforeseen events. In order for the concept of insurance to arise a pre-payment of some type is required. In the case of typical, everybody general auto, health and life insurance for example the pre payment is in the form of a premium. Prior to the eve to the year 2000 thousands of people flocked to the stores stocking up on

numerous supplies. The supplies they purchased would act as a reimbursement in the case of loss. Early insurance goes back to the Egyptians times. It was known that around 3000 BC, Chinese merchants dispersed their shipments among several vessels to avoid the possibility of damage or loss. There are some insurance companies around today in the united states that provided insurance back in the mid 1700s , as well as some that provided relief to banks during the 1930s and depression. Today, there is insurance for many aspects of daily living: business, auto, health, life, travel. Each of those categories includes sub categories, branching of into numerous divisions.

The History of Insurance Worldwide :

The roots of insurance might be traced to Babylonia, where traders were encouraged to assume the risks of the caravan trade through loans that were repaid (with interest) only after the goods had arrived safelya practice resembling bottomry and given legal force in the Code of Hammurabi (c.2100 B.C.). The Phoenicians and the Greeks applied a similar system to their seaborne commerce. The Romans used burial clubs as a form of life insurance, providing funeral expenses for members and later payments to the survivors. With the growth of towns and trade in Europe, the medieval guilds undertook to protect their members from loss by fire and shipwreck, to ransom them from captivity by pirates, and to provide decent burial and support in sickness and poverty. By the middle of the 14th cent., as evidenced by the earliest known insurance contract (Genoa, 1347), marine insurance was practically universal among the maritime nations of Europe. In London, Lloyd's Coffee House (1688) was a place where merchants, shipowners, and underwriters met to transact business. By the end of the 18th cent. Lloyd's had progressed

into one of the first modern insurance companies. In 1693 the astronomer Edmond Halley constructed the first mortality table, based on the statistical laws of mortality and compound interest. The table, corrected (1756) by Joseph Dodson, made it possible to scale the premium rate to age; previously the rate had been the same for all ages. Insurance developed rapidly with the growth of British commerce in the 17th and 18th cent. Prior to the formation of corporations devoted solely to the business of writing insurance, policies were signed by a number of individuals, each of whom wrote his name and the amount of risk he was assuming underneath the insurance proposal, hence the term underwriter. The first stock companies to engage in insurance were chartered in England in 1720, and in 1735, the first insurance company in the American colonies was founded at Charleston, S.C. Fire insurance corporations were formed in New York City (1787) and in Philadelphia (1794). The Presbyterian Synod of Philadelphia sponsored (1759) the first life insurance corporation in America, for the benefit of Presbyterian ministers and their dependents. After 1840, with the decline of religious prejudice against the practice, life insurance entered a boom period. In the 1830s the practice of classifying risks was begun. The New York fire of 1835 called attention to the need for adequate reserves to meet unexpectedly large losses; Massachusetts was the first state to require companies by law (1837) to maintain such reserves. The great Chicago fire (1871) emphasized the costly nature of fires in structurally dense modern cities. Reinsurance, whereby losses are distributed among many companies, was devised to meet such situations and is now common in other lines of insurance. The Workmen's Compensation Act of 1897 in Britain required employers to insure their employees against industrial accidents. Public liability insurance, fostered by legislation, made its

appearance in the 1880s; it attained major importance with the advent of the automobile.

Insurance Industry in India :

The origin of life insurance in India can be traced back to 1818 with the establishment of the Oriental Life Insurance Company in Calcutta. It was conceived as a means to provide for English Widows. In those days a higher premium was charged for Indian lives than the non-Indian lives as Indian lives were considered riskier for coverage. The Bombay Mutual Life Insurance Society that started its business in 1870 was the first company to charge same premium for both Indian and non-Indian lives. In 1912, insurance regulation formally began with the passing of Life Insurance Companies Act and the Provident Fund Act. By 1938, there were 176 insurance companies in India. But a number of frauds during 1920s and 1930s tainted the image of insurance industry in India. In 1938, the first comprehensive legislation regarding insurance was introduced with the passing of Insurance Act of 1938 that provided strict State Control over insurance business. Insurance sector in India grew at a faster pace after independence. In 1956, Government of India brought together 245 Indian and foreign insurers and provident societies under one nationalized monopoly corporation and formed Life Insurance Corporation (LIC) by an Act of Parliament, viz. LIC Act, 1956, with a capital contribution of Rs.5 crore. Before 1956, insurance was private with minimal government intervention. In 1956, life insurance was nationalized and a monopoly was created. In 1972, general insurance was nationalized as well. But, unlike life insurance, a different structure was created for the industry. India had the nineteenth largest insurance market in the world in 2003. Strong economic

growth in the last decade combined with a population of over a billion makes it one of the potentially largest markets in the future. Insurance in India has gone throughtwo radical transformations. One holding company was formed with four subsidiaries. As a part of the general opening up of the economy after 1992, a Government appointed committee recommended that private companies should be allowed to operate. It took six years to implement the recommendation. Private sector was allowed into insurance business in 2000. However, foreign ownership was restricted. No more than 26% of any company can be foreignowned. A totally regulation free regime ended in 1912 with the introduction of regulation of life insurance. A comprehensive regulatory scheme came into place in 1938. This was disabled through nationalization in what follows, we examine the insurance industry in India through different regulatory regimes. But, the Insurance Act of 1938 became relevant again in 2000 with deregulation. With a strong hint of sustained growth of the economy in the recent past, the Indian market is likely to grow substantially over the next few decades. The rest of the chapter is organized as follows. First, we study the evolution of insurance business before nationalization. This is important because the denationalized structure brought back to play important legal rules from 1938. Next we analyze the nationalized era separately for life and property casualty business as they were not nationalized simultaneously. Much of post-independence history of insurance in India was the history of nationalized insurance. In the following section, we examine the new legal structure introduced after the industry was denationalized in 2000. In the penultimate section, we examine the current state of play and projected future of the industry.

Life Insurance : At a Glance

life insurance provides your family with a sum of money should something happen to you. It thus permanently protects your family from financial crises. Life insurance is a guarantee that your family will receive financial support, even in your absence. Put simply, In addition to serving as a protective cover, life insurance acts as a flexible money-saving scheme, which empowers you to accumulate wealth-to buy a new car, get your children married and even retire comfortably. Life insurance also triples up as an ideal tax-saving scheme. To know more, read the Key

Benefits of Life Insurance.

There are many options with coverage, depending on insured situation. And there are two main categories of life insurance: term life, and whole life insurance. Term life is the simplest and least expensive type of policy. Its pure insurance with no cashvalue account. A term life policy has only one function: to pay a specific lump sum to whomever you have designated, upon a specific event of insured death. Whole life insurance provides permanent protection insured dependents while building a cash value account. With this type of insurance, the insurance company manages the policies various accounts. In the first few years, when youre young, its cost will be low, so the bulk of the money goes to pay the agent and into an investment account. However, as you get older, the cost of insuring you increases, so less of your premium goes into the

investment account. The money that goes into the account in the early years of your policy therefore grows. The cash value of your whole life policy is the amount youd get if you decide to surrender it. Whole life insurance is so named because its designed to stay in force throughout your life.

Insurance Act, 1938

In 1938, with a view to protect the interest of insuring public, earlier legislation(1928) was consolidated and amended by the Insurance Act, 1938 with comprehensive provisions for detailed and effective control over the activities of insurer. For the first time in the history of insurance in India, the whole business was brought under a unified system of control and its structure strengthened by statutory regulations. Weaker elements were weeded out; indiscriminate promotion was checked and speculative insurance was eliminated. The best proof the soundness of the law was the effective check on large scale liquidations which had marred the name of insurance in the thirties. In due course, various amendments were made in the Indian Insurance Act 1938 in subsequent years to improve the regulatory mechanism. The Act of 1938, which in many respects codified and modernized the laws relating to insurance in the country, suggest the same noteworthy changes in regulation and organization of business. It was considerable step forward in the direction to envelop all forms of insurance.

Malhotra Committee
In 1993, the first step towards insurance sector reforms was initiated with the formation of Malhotra Committee, headed by former Finance Secretary and RBI Governor R.N. Malhotra.

The committee was formed to evaluate the Indian insurance industry and recommend its future direction with the objective of complementing the reforms initiated in the financial sector.

Key Recommendations of Malhotra Committee Structure

Government stake in the insurance Companies to be brought down to 50%. Government should take over the holdings of GIC and its subsidiaries so that these subsidiaries can act as independent corporations. All the insurance companies should be given greater freedom to operate.

Competition
Private Companies with a minimum paid up capital of Rs.1billion should be allowed to enter the industry. No Company should deal in both Life and General Insurance through a single Entity. Foreign companies may be allowed to enter the industry in collaboration with the domestic companies. Postal Life Insurance should be allowed to operate in the rural market. Only one State Level Life Insurance Company should be allowed to operate in each state.

Regulatory Body
The Insurance Act should be changed. An Insurance Regulatory body should be set up. Controller of Insurance should be made independent.

Investments
Mandatory Investments of LIC Life Fund in government securities to be reduced from 75% to 50%. GIC and its subsidiaries are not to hold more than 5% in any company.

Customer Service
LIC should pay interest on delays in payments beyond 30 days Insurance companies must be encouraged to set up unit linked pension plans. Computerisation of operations and updating of technology to be carried out in the insurance industry. Malhotra Committee also proposed setting up an independent regulatory body The Insurance Regulatory and Development Authority (IRDA) to provide greater autonomy to insurance companies in order to improve their performance and enable them to act as independent companies with economic motives. Insurance sector in India was liberalized in March 2000 with the passage of the Insurance Regulatory and Development Authority (IRDA) Bill, lifting all entry restrictions for private players and allowing foreign players to enter the market with some limits on direct foreign ownership. There is a 26 percent equity cap for

foreign partners in an insurance company. There is a proposal to increase this limit to 49 percent. The opening up of the insurance sector has led to rapid growth of the sector. Presently, there are 16 life insurance companies and 15 non-life insurance companies in the market. The potential for growth of insurance industry in India is immense as nearly 80 per cent of Indian population is without life insurance cover while health insurance and non-life insurance continues to be well below international standards.

Regulator Of Insurance Industry In India : IRDA

The Insurance Regulatory and Development Act of 1999 were set out as follows. To provide for the establishment of an Authority to protect the interests of holders of insurance policies, to regulate, promote and ensure orderly growth of the insurance industry and for matters connected therewith or incidental thereto and further to amend the Insurance Act, 1938, the Life Insurance Corporation Act, 1956 and the General Insurance Business (Nationalization) Act, 1972. The Act effectively reinstituted the Insurance Act of 1938 with (marginal) modifications. Whatever was not explicitly mentioned in the 1999 Act referred back to the 1938 Act? (1) It specified the creation and functioning of an Insurance Advisory Committee that sets out rules and regulation. (2) It stipulates the role of the Appointed Actuary. He/she has to be a Fellow of the Actuarial Society of India. For life insurers the Appointed Actuary has to be an internal company employee, but he or she may be an external consultant if the company happens to

be a non-life insurance company. The Appointed Actuary would be responsible for reporting to the Insurance Regulatory and Development Authority a detailed account of the company. (3) Under the Actuarial Report and Abstract, pricing of products have to be given in detail. It also requires details of the basic assumptions for valuation. There are prescribed forms that have to be filled out by the Appointed Actuary including specific formulas for calculating solvency ratios. (4) It stipulates the requirements for an agent. For example, insurance agents should have at least a high school diploma along with training of 100 hours from a recognized institution. (5) Under Assets, Liabilities, and Solvency Margin of Insurers, the Insurance Regulatory and Development Authority has set up strict guidelines on asset and liability management of the insurance companies along with solvency margin requirements. Initial margins are set high (compared with developed countries). The margins vary with the lines of business. Life insurers have to observe the solvency ratio, defined as the ratio of the amount of available solvency margin to the amount of required solvency margin: (a) the required solvency margin is based on mathematical reserves and sum at risk,and the assets of the policyholders fund; (b) the available solvency margin is the excess of the value of assets over the value of life insurance liabilities and other liabilities of policyholders and shareholders funds. (6) It sets the reinsurance requirement for (general) insurance business. For all general insurance, a compulsory cession of 20% regardless of line of business to the General Insurance Corporation, the designated national reinsurer was stipulated.

(7) Under the Registration of Indian Insurance Companies, it sets out details of registration of an insurance company along with renewal requirements. For renewal, it stipulates a fee of one-fifth of one percent of total gross premium written direct by an insurer in India during the financial year preceding the year. It seeks to give detailed background for each of the following key personnel: Chief Executive, Chief Marketing Officer, Appointed Actuary, Chief Investment Officer, Chief of Internal Audit and Chief Finance Officer. Details of sales force, activities in rural business and projected values of each line of business are also required. (8) Under Insurance Advertisements and Disclosure, details of insurance advertisement in physical and electronic media has to be detailed with the Insurance Regulatory and Development Authority. The advertisements have to comply with the regulation prescribed in section 41 of the Insurance Act, 1938. The Act of 1938 says, No person shall allow or offer to allow, either directly or indirectly, as an inducement to any person to take out or renew or continue an insurance in respect of any kind of risk relating to lives or property in India, any rebate of the whole or part of the commission payable or any rebate of the premium shown on the policy, nor shall any person taking out or renewing or continuing a policy accept any rebate, except such rebate as may be allowed in accordance with the published prospectus or tables of the insurer. (9) All insurers are required to provide some coverage for the rural sector. It is called the Obligations of Insurers to Rural Social Sectors

OBJECTIVE OF LIC
1. Spread Life Insurance widely and in particular to the rural areas and to the socially and economically backward classes with a view to reaching all insurable persons in the country and providing them adequate financial cover against death at a reasonable cost. 2. Maximize mobilization of people's savings by making insurance-linked savings adequately attractive. 3. Bear in mind, in the investment of funds, the primary obligation to its policyholders, whose money it holds in trust, without losing sight of the interest of the community as a whole; the funds to be deployed to the best advantage of the investors as well as the community as a whole, keeping in view national priorities and obligations of attractive return. 4. Conduct business with utmost economy and with the full realization that the moneys belong to the policyholders. 5. Act as trustees of the insured public in their individual and collective capacities. 6. Meet the various life insurance needs of the community that would arise in the changing social and economic environment. 7. Involve all people working in the Corporation to the best of their capability in furthering the interests of the insured public by providing efficient service with courtesy. 8. Promote amongst all agents and employees of the Corporation a sense of participation, pride and job satisfaction through discharge of their duties with dedication towards achievement of Corporate Objective.

MISSON & VISION

Mission
"Explore and enhance the quality of life of people through financial security by providing products and services of aspired attributes with competitive returns, and by rendering resources for economic development."

Vision
"A trans-nationally competitive financial conglomerate of significance to societies and Pride of India."